Unilever’s Q1’17 Earnings Preview: Improving Profitability Key To Unilever’s Growth

Unilever (NYSE:UL) is all set to release its Q1’17 earnings on April 20th.

Q1’17 was a quarter full of action for Unilever. The company received a buyout offer from Kraft-Heinz for $143 billion, or $50 per share, which it declined terming it as undervalued. This offer led to a 20% rise in the stock price of the company, as investors bought the stock in anticipation that the intrinsic value of the company is at least $50 a share.

In another surprise, the company announced that it is planning to sell off its spreads business and combine the rest of its food business with the refreshment division. The rationale behind the decision was that the spreads and margarine revenues were tumbling in the wake of shifting consumer preference from the artificially processed margarine towards more natural products such as butter.

(See: Why Kraft Heinz’s Focus Might Have Been On Unilever’s Personal Care Business Rather Than The Food Segment)

Apart from the company’s take on its recent announcements regarding its food business, the other two aspects that will remain under the limelight in the Q1’17 earnings release are:

1. The possible improvement in overall operating margins and profitability of the company and,
2. The strengthening personal care segment.

See our complete analysis for Unilever here

Unilever Is Focusing On Margin Improvement

For long, Unilever has lagged behind its competitors when it comes to the margins game. Unilever’s total EBITDA margin of around 18% has been a laggard as compared to P&G’s 28% and Colgate Palmolive’s 30% for FY’16. Also, the recent buyout attempt brought Unilever on its toes as the company came under investor’s attention  around the world. Soon after, it raised its guidance for FY’17 core operating margins, and is now aiming at a margin improvement of anything towards the higher end of 40-80 bps range. Recently, Unilever has also guided for 4-6 billion Euros in annual cost saving, which will primarily be led by efficiency improvement measures such as ‘Zero Based Budgeting.’ Therefore we believe that there can be a slight improvement in margins visible right from the first half of this fiscal.

Out of Unilever’s four divisions, the personal care and food business enjoy EBITDA margins of over 20%, whereas the home care and refreshment business lag behind at 13% and 15.5%, respectively, as per FY’16. However, it is worth noting that premiumization of its ice cream business with the inclusion of brands like Talenti Gelato & Sorbetto and GROM has helped the refreshment business to report a gain of over 300 bps in EBITDA margins since 2014. Similarly, the new innovations and introduction of high end products in the home care segment have also resulted in a 300 bps gain in the margins of that business over the same period. These can turn out to be the additional supportive factors for improvement in overall margins.

Personal Care Remains Strong

Personal care, especially skin & hair care, remains the leading horse for Unilever. The net sales of the division have risen from € 18 billion in FY’13 to over € 20 billion in FY16. We expect this rise in the personal care top line to continue further as the company will reap the benefits of its recent acquisition spree in the skin & hair care segment. Living Proof has been the most recent addition to this list whose acquisition was completed in February of this year.

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research